CRUDE palm oil (CPO) prices have entered the bear market once again, with this round being the worst since the 2008 global financial crisis.
In less than two months, CPO prices have crashed by about 28%, triggering concerns on further price declines and the potential impact on the earnings of the plantation players, especially the smallholders.
After all, oil palm growers had just been enjoying a recovery in CPO prices from mid-October 2019 to January this year, following a low price environment that spanned for over a year.
From a high of RM3,134 per tonne in early January, CPO futures prices fell to RM2,278 per tonne as at press time on March 13, wiping out the gains made since mid-October last year post-price recovery.
Analysts are largely mixed on the oil palm sector’s outlook, with some looking to review their recommendation on the sector.
For the time being, the general market expectation for CPO prices is an average of RM2,300 per tonne or above in 2020.
UOBKayHian Malaysia Research, for instance, expects CPO prices to see a gradual recovery by late second quarter 2020 on tighter supply.
The recent plunge in CPO prices was caused by demand concerns due to the worsening novel coronavirus (Covid-19) outbreak, as well as the negative sentiment that followed the decline in crude oil prices.
The decline in local prices took place even as Malaysia’s palm oil stockpile in February 2020 fell for the fifth consecutive month to hit the lowest level in 32 months.
“Fundamentally, the tight stockpile should support higher CPO prices, but concerns over Covid-19 and low crude oil prices may keep the CPO price upside in check for now, ” says Maybank IB Research.
Meanwhile, RHB Research Institute describes the recent decline in CPO prices as “very much sentiment-driven and not fundamentals-driven”.
“In previous reports, we did not expect to see a significant decline in demand stemming from the Covid-19 outbreak, as palm oil is a staple food product. However, with the recent change in crude oil price fundamentals, the risk of an extended commodity selldown cannot be ignored, ” it adds.
The weak market sentiment has also hammered down plantation stocks, with the Bursa Malaysia Plantation Index down by 24.4% year-to-date.
The country’s top-three plantation stocks by market capitalisation, namely, Sime Darby Plantation Bhd, IOI Corp Bhd and Kuala Lumpur Kepong Bhd, have all declined by about 10%, 6.38% and 6.5% since January 2020.Oil palm growers are also affected by the lower palm oil exports in February due mainly to the key buyers - China, India and the European Union (EU) - buying fewer Malaysian palm oil products.
For context, exports to China, India and the EU in February were down by 11.3%, 54.9% and 17% month-on-month, respectively, to 156,800 tonnes, 21,100 tonnes and 151,800 tonnes.“We still believe that lower exports of palm oil products because of the trade spat with India and the coronavirus in China are likely to be a temporary setback.
“We expect demand for palm oil products to improve in March/April ahead of the Ramadan festivities (which starts in late-April this year) and rapprochement between Malaysia (with its new government) and India, considering India’s decision to lift the safeguard duties on refined palm oil from Malaysia (which was applied in September 2019 until early March 2020), ” according to Affin Hwang Capital Research.
Despite the sector-wide challenges and share price correction, analysts believe that certain stocks remain a good buy for investors.
UOBKayHian Malaysia Research says that quality stocks with positive fresh fruit bunch production growth and better cash flows offer buying opportunities, allowing investors to ride on their good results in the next two quarters.
Meanwhile, Affin Hwang Capital Research says it is “overweight” on the plantation sector, backed by the expectation for 2020 to be a better year for the plantation companies.
“We like Kuala Lumpur Kepong Bhd (large-cap), as we expect future earnings to improve on the back of higher CPO prices, coupled with its cheaper valuation as compared to the sector average, and TA ANN HOLDINGS BHD (small mid-cap) on the back of its improving earnings (higher log sale volume, and stronger CPO production and average selling prices), ” it points out.
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